RTGS FCAs tradability forced

The RBZ building ... Zimbabwe’s mounting economic problems are not rooted in illicit financial flows.

THE Reserve Bank of Zimbabwe (RBZ), through its Financial Markets division, this week sent a directive to banks advising them to test the Real-Time Gross Settlement (RTGS) system for RTGS FCAs, with a view to making the system go live after February 1.

The Brett Chulu Column

This points towards a move to allow tradability between RTGS FCAs and RTGS Bond balances.

We expect that the Monetary Policy Statement likely to be released in the first week of February will add flesh to this move. On October 1 last year, the RBZ’s decision to separate RTGS accounts into FCA and bond triggered mayhem in the forex market, with premiums soaring to a peak of close to 600% before tumbling down to the 300% neighbourhood after government released a statement indicating it had no intentions to de-monetise the quasi-currencies.

The challenge thereafter has been that those who opened RTGS FCAs have found it extremely difficult to access the funds in these accounts. On the surface, it would appear as though the RBZ is now moving to correct this anomaly. There appears to be a deeper motive given the context of the past fortnight in which a 150% fuel price hike was announced.

At the moment, it is not clear what the RBZ has in mind. On the one hand, it could be a precursor to a full liberalisation of the forex market in which the quasi-currencies (bond notes and RTGS dollar balances) will be allowed to freely float against the United States dollar.

On the other hand, the move to make FCA nostro balances tradable locally, could indicate the desire of the apex bank to provide competition to the forex black market by allowing companies that need forex to buy it from entities that have surplus forex positions resident in RTGS FCAs.

The latter would effectively create a gray market for forex. Technically, there is a distinction between a black and a gray market. A black market is an informal market formally declared illegal by the government. A gray market is an informal market that government tolerates implicitly by not formally pronouncing it illegal. The end in mind which the RBZ could be having is bringing down the premiums of the US dollar over the bond note and RTGS dollars, with the hope of bringing down and stabilising inflation.

The RBZ could be harbouring a thesis they want to test: Allowing tradability between RTGS FCAs and RTGS Bond Accounts could ease pressure on hard cash since settlements will be done electronically without hard cash exchanging hands. This thesis, if correct, will mean that local transactions can be settled in US dollars without any movement of hard currency. This will effectively create a pool of forex that industry can tap into by trading their RTGS dollars for real dollars resident in the RTGS FCAs.

For this to happen, government has no option, but to allow the RTGS dollars to float against the US dollar. Our biggest challenge is not the physical bond note; it is the RTGS dollars emanating from about US$10 billion in broad money supply of which about US$5 billion is not supported by hard currency in the form of merchandise exports and other significant forex inflows such as diaspora remittances.

The data released this week by Zimstat, the country’s official data collector, shows that between February and December last year the country’s imports stood at US$6,4 billion against exports of US$4,1 billion, creating a trade deficit of US$2,3 billion, a jump of 75,9% from the prior year’s trade deficit of US$1,3 billion. Merchandise exports in 2017 stood at US$4,286 billion, evidencing that our export growth has plateaued.

This leads me to a thesis.

In my opinion, the RBZ could have been sobered up by the realities of a widening trade deficit and the outlook of a depressed global commodities prices environment. China’s economic growth has decelerated from 6,9% in 2017 to 6,6% in 2018. Coupled with the structural change in China’s economic growth shown by 80% of its economic growth coming from consumption, it is worrisome for Zimbabwe whose major foreign currency generators are commodities.

In the outlook period we can expect the global prices of the second and fourth biggest forex earners (nickel and chromiums) to fall. The nickels (nickel ores-concentrates and nickel mattes), our second largest merchandise export earner (after gold, US$1,1 billion) contributed US$919 million (22% of value of exports). The chromiums (ferro-chromium and chromium ores-concentrates), at US$338 million, contributed 8% of the merchandise export value.

A dip in the global world markets for the chromiums and nickels will significantly reduce our export earnings this year. Gold, due to the trade dispute between China and the US, coupled with the US Fed’s indicative monetary policy direction of fewer Fed rate hikes has forced investors to seek refuge in gold. As a result gold reached and breached the psychological level of US$1 300 per ounce. This may slightly offset our expected losses in chromiums and nickels export values.

With China now having transitioned to internal consumptive growth, tobacco prices might just hold firm. However, the net effect is likely to be an overall decline in merchandise exports, exacerbating our already precarious forex shortages. With a projected poor agricultural season, the 14,4% spike in imports from US$5,593 billion in 2017 to US$6,4 billion in 2018 is likely to increase in 2019 as food imports are likely to rise.

Add to this potent mix, the fact that government is paying back the monies borrowed through short term bridging facilities for export support, running into billions of dollars, the outlook for the forex situation is dire.

A sizeable chunk of future forex earnings are already spoken for (technical term for future cash flows already spent through irrevocable commitments to pay creditors), causing cash flow problems. The RBZ could be realising that in the very near future, they could be having next to nothing to allocate.
This could be one of the major reasons there is a now a decided move to implicitly allow tradability between RTGS FCAs and RTGS Bond funds, the idea being able to bring as much real dollars into a transparent or semi-transparent forex market. There could be hope that the diaspora remittances could be netted in to the formal forex market, giving the black market a run for its money (no pun intended).

The tradability of RTGS FCAs and RTGS Bond balances seems to be a subtle way of ditching the US dollar- RTGS dollar 1:1 fiction, allowing the open and untethered markets to allocate forex.

Personal financial therapy

I am introducing a brief personal financial therapy section in this column to help readers in need of improving their personal financial management. This week we focus on tracking individual expenditure. Get a dedicated notebook and a pen that you will always carry with you. Each time you pay for something whether big or small (even a sweet), record it in your notebook and date it.

Chulu is a management consultant and a classic grounded theory researcher who has published research in an academic peer-reviewed international journal. — brettchuluconsultant@gmail.com